Public Bill Committee

[David Taylor in the Chair]

Written evidence to be reported to the House for publication

PEN 1 AEGON UK

Nigel Waterson: On a point of order, Mr. Taylor. Today is a very important day in the pensions universe. This morning, the European Court of Justice is handing down its judgment in a case brought by Amicus on behalf of former members of the Allied Steel and Wire pension fund. That is massively important, first, for the 125,000 people who have lost their pensions, secondly, because of the estimated £6 billion compensation bill that the Government might be ordered to pay and, thirdly, because the Pension Protection Fund might have to increase its levies on industry by 500 per cent. Has the Minister indicated to you whether he intends to let us have copies of the judgment or to make a statementon it?

David Taylor: That is not a matter for the Chair or for the Committee at this stage.

Clause 5

Up-rating of basic pension etc. and standard minimum guarantee by reference to earnings

Sally Keeble: I beg to move amendment No. 69, in page 5, line 24, at end insert—
‘(aa) the amounts of the additional pension that different persons are entitled to receive;’.
This is a probing amendment to find out the Government’s thinking not only on this matter, but on how the total pension package will look over time. The amendment would include the state second pension in the general index-linking to earnings of the state pension.
Clause 5 has been profoundly welcomed. It is seen as righting a wrong done by the previous Conservative Government by ensuring that the value of the basic state pension keeps pace with the increase in earnings. However, the one thing that seems to be missing from the list of items covered is the state second pension, so the amendment would add it to the list. The state second pension will be index-linked to earnings and accruals and will keep pace with the rises in them as people pay in during their working lives. However, in terms of paying out, it is not listed as one of the items that will be linked with the rise in the level of earnings. 
I should make a couple of points about that. First, I hope that the state second pension will be a substantial part of people’s income during retirement and I have recently tabled several questions to find out how many people receive it. I have not heard people talking about it much in my constituency, but it is obviously relatively new and its impact has perhaps not been fully felt. When it first came in, it was dubbed the carers pension because it would particularly help people with lower earnings and interrupted work patterns.
I believe, in fact, that the level of state second pension will be quite substantial. My hon. Friend the Minister will correct me if I am wrong, but I think that it will be about 40 per cent. of people’s income in retirement, where they get both the basic state pension and the state second pension. For an awful lot of other people, the real issue may be what is in their personal accounts, occupational pensions and other pension schemes. However, for those on lower earnings who get the carers credit, the state second pension will be a really big component of their income after retirement
The other point that I want to stress to the Minister is that women are particularly interested in the state second pension, and it is important that their income in retirement is maintained. Of course, women live longer than men, so it is even more important that a pension that is designed for women should retain its value over a longer period. As we have seen with the erosion of the value of the state pension, if a pension is not linked to the rise in earnings, over the longer time that women live during retirement, it will actually lose value. In addition, the effect of a lack of index linking would, for women, be more substantial.
The total package in the Bill is extremely goodand the difference made to the income of women pensioners will be important. However, it is also important, not just that women retire on a decent income in their own right, but that they continue to have that during retirement. Many women do not have access to personal accounts, but we also know from the work of the Turner commission that women do not have the same access to occupational pensions. Therefore, the kind of package that is in the Bill will be particularly important for them and the state second pension will be a vital part of their retirement package. Will the Minister set out what the thinking is on that issue? First, why was the decision taken not to add additional pensions—the state second pension—to the list in clause 5? Also will he set out what he expects the pattern of women’s income during retirement to be and how their package will be made up?
When talking to women in my constituency, I am struck that it is not simply a matter of saying, “You have had your income and that’s it,” or “You have your occupational pension.” While they are working, women receive a package of income made up of different things and in retirement they have a package of retirement income made up of different bits of pension and benefits. How is it envisaged that that package will be made up and, as the value of the state second pension goes down, what will be brought in to get that income up again? It is generally accepted that costs increase as people get older because they need more fuel and they do not have mobility. As this is a probing amendment to find out how the Bill will work in practical terms, could the Minster say whether the Government will monitor the gender issues surrounding the state second pension? Also, over time, will they look at the impact of not having the same index linking for the state second pension as for the basic state pension and, in particular, would they consider a gender impact assessment on that issue?
The progress made for women pensioners has been astounding. I know that the Opposition do not like the pension credit, but it has been incredibly important for women to maintain their income during retirement. The carers credit and the state second pension have also been important additions and the carers credit that is set out in the Bill will transform the situation for many women. The arrangement in the Bill will last decades, and as we move forward it is important that we do not see an erosion of what should be a good and secure package for women pensioners.

Nigel Waterson: I am grateful to the hon. Member for Northampton, North for tabling and moving this amendment. I am equally pleased that she confirmed that it is a probing amendment. She made some interesting points, particularly about the effects of the Bill on women, and I am sure that her comments were right. I do not want to steal the Minister’s thunder, but I suspect that the answer to her fundamental question is that it would cost too much. However, I am particularly keen to hear what he has to say about the cost of going down that road.
May I correct one small thing? The hon. Lady said that the Conservative party does not like pension credit. It is important to put on the record that we would not have introduced it, but have no intention of scrapping it. However, we want fewer pensioners subject to it as time goes on. As she well knows—she follows such things closely—about 1.5 million pensioners do not claim pension credit who are entitled to do so. I hope that that is clear.
There is a real issue here: the state second pension is an important lifeline for many people and can makeall the difference to their standard of living during retirement. There is a double whammy because not only are the Government not proposing to uprate the S2P with earnings, as the hon. Lady’s amendment points out, but they are going to flat-rate it, which will particularly affect medium and higher earnings. We will debate that at greater length later, hence I have kept my remarks rather short. She is approaching that from a different direction, but it is important that we hear from the Minister the Government’s justification for leaving out the additional pension from this important uprating move.

David Laws: I welcome you back to the Chair, Mr. Taylor, for today’s debate on clause 5, which I think is probably the most exciting part of the Bill—if excitement is the right word to use. The hon. Member for Northampton, North has got us off to an interesting start by raising some important points about how the state second pension will be uprated in the future and what the implications will be.
Obviously, my party would prefer a better universal state pension at a higher level earnings link. We have not, therefore, put down a probing amendment like that of the hon. Lady. However, she has raised an important point that deserves discussion and a response from the Minister. Her point is that we will still have a very low basic state pension compared with other major developed countries and will be flat-rating the state second pension. At some stage there mightbe an aspiration to bring the two together. In the meantime, we are moving away, philosophically, from the idea that the state should provide a second pension related to earnings and towards the assumption that people will have personal accounts and be encouraged to save.

James Purnell: I am very interested in what the hon. Gentleman is saying. Will he clarify something? His party’s policy is to abolish the state second pension. Through the state second pension, millions of people receive about £135 a week, which is more than the guaranteed pension credit of £115 a week. So would his party reduce the amount that those people receive to £115 a week? If not, how is his party’s package affordable?

David Laws: The Minister knows very well that there are many ways in which to implement a citizen’s pension, including those put forward by the National Association of Pension Funds and the Pensions Policy Institute, that do not involve the type of losses about which he is concerned. However, there is a legitimate concern, which the hon. Member for Northampton, North raised, that many vulnerable pensioners such as women who might not have a full work history, whom the Government might once have intended should rely on a state second pension, will not be able to do so on one that is earnings uprated. Further problems might arise as a consequence of the extent of means-testing in personal accounts. So she has raised legitimate concerns about whether the pensions architecture that we are putting in place, without the earnings link to the state second pension, will serve those vulnerable groups. This preliminary debate has, therefore, been useful.

James Purnell: It is a pleasure to serve under your chairmanship again, Mr. Taylor. I am grateful to my hon. Friend the Member for Northampton, North for tabling the amendment, because it allows us to have what is an important debate about the state second pension and our uprating proposals. It has also flushed out a couple of interesting points about Opposition policy.
On the Liberal Democrat policy on a state second pension, I notice that the hon. Member for Yeovil ducked the question again, but he will not be able to duck it for ever, because I think that about half of pensioners receive more than £115 from the pension system. They may receive that through premiums on pension credit for being disabled or being carers. The hon. Gentleman is not saying whether he would abolish those. Those pensioners also receive more through the state second pension. Would the hon. Gentleman set the citizen’s pension at a level that was higher than what all those people get—at perhaps £170 or £180 a week? Just going to £115 for everyone would mean£5 on income tax, so if the hon. Gentleman proposes a citizen’s pension that involves no losers at all, there would need to be a significant hike in public spending. I suspect that he does not propose that, so he would have to take some money off some people.
We look forward to him telling us how he will explain to the millions of pensioners who receive£130 or £135 a week from their combination of basic state pension and state second pension which premiums he would abolish on pension credit. We have asked him that question a number of times, but he has failed to answer it, and as long as he does not answer it, we will assume that he would take money away from people.

Andrew Selous: The Minister said that the proposal would mean an extra £5 on income tax. Did he mean an extra 5 per cent. on income tax?

James Purnell: I meant 5p.

David Laws: Does the Minister agree that the last time we heard the suggestion that pension proposals would lead to an extra 5p on the standard rate of income tax, it came from the Chancellor of the Exchequer’s own advisers when they tried to abort this very reform? Given that, should we really take such suggestions seriously?

David Taylor: Order. May I guide the Minister back to the subject of the amendment on the amendment paper?

James Purnell: Absolutely. In fact, the very policy that the hon. Member for Yeovil proposes was rejected by the Pensions Commission, which he mentioned, so we notice that yet again he has failed to answer the point. Until he does, we will not take him seriously on the subject of means-testing.
The amendment is important. It gives us an opportunity to talk about the right way to do earnings uprating. That has been a hot topic for Governments for many decades. The previous, Conservative Government broke the link between the basic state pension and earnings. During the past few years, the present Government have come under pressure to increase the basic state pension in line with earnings, and we are now doing so through the Bill, but only because we are able to take the difficult decisions on the state pension age that make an increase affordable for the long term. We can discuss that under later amendments.
This amendment opens up what will be a recurring theme throughout our morning, which is affordability and sustainability. The Bill is part of a carefully constructed package of reforms that we believe are affordable and sustainable in both the short and the long term.
The Pensions Commission emphasised the importance of uprating the basic state pension in line with earnings. It wanted that to be done to give people a clear and stable set of incentives and certainties on which to build their private saving. The commitment that we gave in the White Paper was to link the basic state pension to rises in average earnings, and the Pensions Bill delivers on that commitment. However, the effect of the amendment would be to apply that to the value of any additional pension, and I am afraid that the hon. Member for Eastbourne is right in that regard. I know that that is why it is a probing amendment—my hon. Friend wants the principles behind what we are doing to be understood. It would add a further £14 billion to the annual pensions bill by 2050, which is 0.4 per cent. of GDP, but even setting aside the cost, neither we nor the Pensions Commission think that it would be the right thing to do.
The essential question is whether, within one envelope of public spending, we should set the pension, at the start of people’s retirement, at a level that wecan uprate in line with earnings throughout their retirement, or whether we should give them a bit more at the time of retirement and then have it going up faster than inflation, but a bit slower than earnings. We and the Pensions Commission believe that the latter is better. When pensioners explain to us how they want to spend their money, they say that they prefer to have a bit more when they retire and then have an increase in line with a mixture of earnings and inflation.
The Pensions Commission said that pensions in accrual should track earnings and that in retirement, pensions should maintain pensioners’ purchasing power, but not necessarily rise beyond that. The commission also made it clear that in retirement it is appropriate to maintain overall pensioner incomes, which includes the state second pension, somewhere between earnings and prices. The Government agree with this view because, when one looks at the spending pattern of pensioners, one finds it is reflected exactly by what they do.
Where people have a choice at retirement they invariably choose a higher income over protection against inflation. For instance, when people annuitise their pension pots, most opt for the highest income possible—many do not even buy price indexation. However, it is not just evidence from annuities that demonstrates that. Evidence from research carried out by the Pensions Commission, and from independent research commissioned by us, supports that view, showing that it would be more appropriate to have a higher initial state second pension that is uprated by prices, rather than a lower initial state second pension uprated by earnings. To put it another way, to achieve what the amendment sets out in the same spending envelope, we would have to reduce the amount that people got at retirement, which is not what the evidence suggests that people want.
Qualitative research shows that the pensioners who feel worse off are those who have most recently retired and have seen their income fall, compared with the amount that they received in employment. The Pensions Commission’s first report shows that older pensioners are likely to spend around three quarters of their income. Therefore, our proposed reforms match the profile of pensioner spending. When pensioners retire, they spend about 90 per cent. of their income, and they spend about 75 per cent. of it when they get older. Our reforms match the profile of that spending, which is highest at the point of retirement, and uprated between inflation and earnings after that.
However, there is a further problem with the amendment, which is that those contracted out of the state second pension would also face considerable difficulty. We would, in effect, require defined benefit schemes to provide earnings indexation for that part of the occupational pension derived from the state second pension, and the rest of the pension would be indexed in line with inflation. No private scheme could face the burden of such commitment and it is clear that additional funding would be required through the national insurance rebate to provide for future pensioners.
In addition, it is very difficult to imagine the sort of administrative process we would need in place to identify and uprate the contracted-out equivalent of the state earnings-related pension scheme or the state second pension for current pensioners, or how we would reimburse occupational pension schemes for paying an earnings uprated element on the Government’s behalf.
I hope that I have explained to my hon. Friend the Member for Northampton, North the reasons behind what we have done, and why the Pensions Commission recommended it. For those of us who think that the state second pension is an important part of the contributory principle and do not want to take it away from millions of people, the provisions represent the right way of uprating, and I hope, therefore, that she will be satisfied and withdraw her amendment.

Sally Keeble: I am grateful for that explanation, which sets out the practical problems and the costs very clearly. I hope that the hon. Member for Yeovil has not been totting up my bill, thus making it £15 billion that I have spent. It would be helpful if the Government would give assurances that they will monitor the impact of the provisions, particularly on women. If women have only the state pension and state second pension on retirement, it is important that they do not find that their position deteriorates.

James Purnell: I am very happy to give my hon. Friend that assurance.

Sally Keeble: I am grateful to the Minister for that,and with that I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

David Laws: I beg to move amendment No. 28, in page 5, line 26, at end insert
‘including those claimed by British citizens living abroad’.
I rise with enthusiasm and some trepidation to speak to this amendment. I should point out that I was criticised—scolded, even—by the hon. Member for Northampton, North the other day for speaking too briefly on one of my amendments. She encouraged me to speak for longer periods. I think it was Oscar Wilde who said that there are two tragedies in life, one is not getting what you want, the other is getting what you want. He said that the latter is the real tragedy. Today, I am afraid that the hon. Lady may get what she asked for, because the clause covers many important issues on which we may want to spend more time.
I have not only taken the hon. Lady’s advice about the length of my speeches, but learned tremendously from the way in which she presents her expensive amendments, which gives me extraordinary cover for my modest proposals. She describes her amendments as probing, and apparently those words mean thatthe Minister cannot attribute any excessive public expenditure to them.

James Purnell: Does the hon. Gentleman propose a probing manifesto when he goes to the electorate?

David Laws: I do not propose a probing manifesto; today I propose a probing amendment. I want to encourage a good debate by reassuring Members from all parties that I shall not press for a Division. I hope that we can have a constructive and intelligent debate, without people worrying about having to vote one way or the other. At the end of my speech I shall discuss the financial issues that relate not only to the amendment, but to the financial issues behind amendment No. 28 and some of the other proposals that we have tabled for discussion today.
I hope that at that stage, Mr. Taylor, you will feel that my comments have been in order, and I hope also that my strategy will have saved time in the later debate on amendments to the earnings link. I shall of course bow to your judgment about what is in order and try to keep strictly to the financial issues that relate to the amendment before us.
I promise the Minister—and other Members who want to discuss the financial issues that relate to the amendment and to the different proposals—that I shall spend time at the end of my speech discussing those issues. Following that would be the obvious time for the Minister to make the points that I know he will make.
I hope, however, that we can have a sensible and constructive debate. I am conscious that this is not a single-party issue. Members from all parties have spoken passionately in the Commons and in another place about the injustice that the amendment seeks to address. When I sat on a Delegated Legislation Committee recently, to which the Under-Secretary responded, the hon. Member for Worthing, West (Peter Bottomley) made an excellent speech about the injustices and consequences of the way in which UK pensions are uprated. I am also conscious that many Labour Members have spoken about the issue. The hon. Member for Tooting (Mr. Khan) secured an Adjournment debate not that long ago.
This is a serious issue about the way in which people who have lived in the United Kingdom and are entitled to the basic state pension have it uprated when they decide to move abroad. One group of pensioners receives the uprating in line with the retail prices index, which everybody in this country receives, but another group of pensioners in about 150 countries does not receive any uprating at all. Their pension is frozen at that level while they remain overseas. When they come back, it is returned to the level that it would have been at had the pensioners remained in the United Kingdom.
I welcome the fact that the Minister has met Mr. John Markham, who represents a group of pensioners from several different countries. The Minister will know how passionately they feel about that potential injustice. The reason why it is so important is that the Bill will change the uprating mechanism from prices to earnings. Unless I have got it wrong—if I have, I hope the Minister will stop me now before I make a fool of myself—it is proposed to uprate a number of countries by earnings rather than by prices. The other lot, in the other 150 countries, will be uprated at zero—they will not receive anything atall. In other words, the existing injustice will be considerably magnified. I shall discuss whether the current situation is unfair and then turn to the financial consequences of dealing with it, what the options might be, what is affordable or unaffordable, and what might be a reasonable way forward.
Since I have had this portfolio—it is about 18 months, but that is a long time in the world of work and pensions—I have raised this matter several times, but I always receive an unusual response. Even the Minister for Pensions Reform, for whom I have a great deal of admiration, and his predecessor, who did an excellent job, seemed mystified that I had raised the issue.
That is odd coming from a Labour Government, because uprating arrangements for the pensions of those who live abroad represent an enormous injustice. They are totally arbitrary and illogical. The Labour Government committed themselves in 1997 to deal with unfairness in society. Indeed, a junior spokesman had already made a commitment to address the issue if the party got into power. The Government should be concerned; they should not respond as if it was an oddity or the obsession of only a few Members.
I hope that those in the governing party do not think that those pensioners are rather affluent Tories who have gone abroad, and that they can be written off because they are not going to vote for the Government or are not sympathetic to their party, or because they do not have voting rights abroad. I do not think that that is so. However, we are certainly talking about people who may have different political views.
We should also remember—I hope we do, if our debates descends into a party-political knockabout—that many of those people can still exercise their vote in the United Kingdom. Indeed, I hope that they will make their voice heard in the debate on pensions. They also have families in the UK who will have strong views on the subject. Indeed, many in the UK who may think of moving abroad in future will want the Government to put in place arrangements that give them the real freedom to decide where to go.
Over recent years, a number of Ministers have defended the existing situation, saying that people have a free choice about where to go, and that they should go to countries where we have special uprating arrangements. In the modern world, our aspiration is for citizens to be free to make their own decisions; the idea that they should be influenced by arbitrary historic arrangements on whether the countries that they choose will allow their basic pension to be uprated is ludicrous. As a Liberal Democrat, I feel passionate about that, and I hope that other Members do too.
Although it seems a bit of an oddity—it sounds as if it affects a rather small number of people—it affects an increasingly large number. The number drawing state pensions and living abroad has risen rapidly. It was 575,800 in 1990; and in 2003 it was 952,000. I do not have a figure for 2005-06, but I suspect that it is more than 1 million. Only 11 million or 11.5 million people are drawing the basic state pension, so we will pretty soon get to the state when one in 10 of our pensioners live overseas.
At the moment, more than half of the pensioners who live overseas have their pensions frozen. It is not a minor issue that affects only a few people. It affects many, and because of the huge disparity in property prices between the UK and abroad there will be an increasing pull for people to move abroad.

Sally Keeble: Would the hon. Gentleman accept that many of those who retire and go abroad are not casting around for where the weather is better and the living is cheaper? An awful lot are returning to their families or to their countries of origin after spending their working lives in this country. It is not quite the pattern that he presents.

David Laws: The hon. Lady makes a powerful point, which I think supports my argument.

Sally Keeble: I am making a factual point.

David Laws: It may simply be factual, but I see it as a helpful fact. The view of Ministers sometimes seems to be that provided that people are well informed and that the DWP does its job, they can choose to go to the United States rather than Canada, or pick the right island in the Caribbean, where some have the arrangements and some do not. That is not how life works, however. People may have family links, and if they have a relative abroad who becomes very ill, they may want to live near them or take up caring responsibilities. My noble Friend Lord Jones of Cheltenham made a very good speech in the Lords—his maiden speech—on this subject. He cited several cases that demonstrate that there is clearly unfairness in the existing arrangements that people cannot easily avoid simply by picking one of the random countries where we have the uprating arrangement.
I hope that we can have a sensible debate about this issue. I said at the beginning of my speech that I rose to speak with some trepidation. That is because this subject has been considered in the House for so long. When we debated it recently in another Committee,in which the Under-Secretary was the responding Minister, I gave the following quote from paragraph 8 of the 1996 report of the Select Committee on Social Security:
“In the early 1960s, criticism of the policy began to build up. By 1963, the Ministry of Pensions and National Insurance was regularly receiving correspondence from MPs and from pensioners living abroad protesting at the unfairness of not paying increases to those living abroad.”—[Official Report, First Standing Committee on Delegated Legislation, 15 May 2006; c. 4.]
I am afraid that this issue has been going on for some time. There must be an enormous file somewhere in the DWP that the Minister could look through, unless it was lost in the fires of the 1960s, the floods of the 1970s or the transfer of the Department from one spot to another—or perhaps it was shredded by some Minister.
The issue has also been dealt with in the courts in the past two years, and it may well be again. I hope that, if we do not make some movement in this place, the courts might prod us into doing so. There is a fundamental injustice here of the type that the courts are increasingly being given the power to challenge. The current judicial view is mostly that this is very much an issue for Parliament. Lord Justice Laws, who is no obvious relation of mine, said in 2002 that
“the remedy of the expatriot united kingdom pensioners who do not receive uprated pensions is political, not judicial. The decision to pay them uprated pensions must be made by Parliament.”
This is an issue on which we in this place should make a decision.
The details of the situation are relatively well known. I shall not take to heart too much the encouragement of the hon. Member for Northampton, North to speak for ever, citing all the countries that have frozen pensions.

Russell Brown: I hope that the hon. Gentleman will excuse my ignorance; I genuinely do not know the answer to this question. Perhaps he can help me. If a pensioner lives overseas but their income puts them into a category in which they must pay tax, where do they pay it—in the UK or in the country where they live?

David Laws: The Minister may correct me, but I do not believe that such a pensioner would pay tax in the UK. Of course, neither would they receive the benefits that they would have in the UK, such as the use of the NHS. The hon. Gentleman makes a serious and proper point about the balance of financial advantage to the UK of having people move abroad. We might, as he fairly suggests, lose some tax revenue from people who move abroad, although if they are receiving only the basic state pension, they are likely not to pay much tax anyway, given the level of personal allowances for senior citizens. Nevertheless, he raises a serious point, which I shall take up later in my speech, about the need to understand better how much we are saving as a consequence of people moving abroad and how much more we would have to spend under the proposal. Whatever his view on whether we should uprate pensions for those who move abroad, however, we surely cannot defend the current situation, in which some are uprated and some are not. He will know that even Ministers have admitted that the situation cannot be defended on the basis of any logical and rational system.

Nigel Waterson: On the point about the balance of advantage, has the hon. Gentleman given any thought to pensioners from Australia and Canada, for example, who are resident in this country and do not get uprated pensions and so may claim means-tested benefits here? On the other hand, the Exchequer may save costs respecting poorer pensioners; although there is an assumption that these are all wealthy people going abroad who might entertain the Prime Minister for his holidays, those who are relatively poor might go to Spain because they will not have to pay a lot of heating bills, but might claim means-tested benefits to top up their pensions from Spain or any other foreign country.

David Laws: The hon. Gentleman raises an excellent point. The debate and any changes would need to happen in the context of reciprocal arrangements so that there was some fairness. If we were proposing changes, we would expect that back from other countries. It is worth mentioning briefly which countries we are talking about. My understanding is that those counties with uprating arrangements—I take this from a parliamentary answer from October 2004—are those within the European economic area, including Gibraltar, and those with which the United Kingdom has reciprocal arrangements, which include Barbados, Bermuda, the Channel Islands, Israel, Jamaica, Malta, Mauritius, the Philippines, Switzerland, Turkey, the USA and the separate republics of the former Federal Republic of Yugoslavia. About 152 other countries do not have uprating arrangements, and Members might be interested to know that the gender impact is that a disproportionate number of the individuals affected by the failure to uprate are women. We have a relatively recent parliamentary answer—

Sally Keeble: The hon. Gentleman used the word “disproportionate”. Are the figures around somewhere? I would be interested to see them.

David Laws: Yes. The figures that I have probably go back a couple of years, but the Minister might have some more up-to-date figures. When the parliamentary answer to which I referred was received, some 478,000 pensioners’ pensions were frozen. There are now some 520,000, so the proportions will not be far off. Of those 478,000, about 288,000 were female and 191,000 male. Perhaps that reflects life expectancy issues to some extent, but it also underlines the fact that somebody moving abroad, of either sex, who ends up living for a long period after they move will end up feeling the squeeze from the failure to uprate. Not only will their pensions not only fall behind earnings and the income of the rest of the population, which is usually the issue of concern to this place when we talk about people living in this country, but potentially fall in real terms.
There is a long list of individual countries where uprating does not take place, because that is the case in the majority of countries; there are about 152 such countries. A great deal of frustration and mystification is caused by the fact that many of those countries are the Commonwealth countries, which we have close relationships with and which a lot of people move to. The latest figures that I have on that, from February 2006, which are from a parliamentary answer of December 2006, show that there are about 240,000 such pensioners living in Australia and 153,000 in Canada. We should bear it in mind that those who move over the border to the United States of America do have their pensions uprated, whereas people in Canada do not. There are also 46,000 such pensioners in New Zealand and 37,000 in South Africa. I understand that pensioners in those four countries make up 90 per cent. of the pensioners whose pensions are frozen.
There are some extraordinary anomalies, which people frequently raise. The hon. Member for Daventry, who spoke for the Conservatives during our debate on the issue last year, mentioned something that I had not spotted—the uprating in Guadeloupe and Martinique, which are both French overseas territories and therefore fall under the European Union rules. However, in other countries out in the Caribbean there is no uprating. Indeed, there are considerable differences even among the countries with which we have close links. For example, people living in Bermuda, Gibraltar and the sovereign-based area in Cyprus all have their UK state pensions uprated, but those on the British Virgin Islands, the Cayman Islands, the Falkland Islands, Montserrat, Pitcairn Island and St. Helena, and those in the dependencies, do not receive the uprating. That is an additional bizarre situation, in which pensioners in British overseas territories do not receive the uprating.
The Government’s excuse at times has been that they were not able to negotiate reciprocal arrangements with other countries. However, in this case they would be negotiating with themselves, so one would have thought that it would be quite easy to secure an agreement. Those in the know will also be aware that if there were any pensioners on the British Antarctic Territory and the British Indian Ocean Territory, they would also have their pensions frozen—frozen pensions in the Antarctic is one of the in-jokes of the frozen pension world, so I thought that I would give the hon. Member for Weston-super-Mare an opportunity to contribute on that point.
That is the current situation. The question is why we got there. My understanding from listening to the debates and the ministerial explanations to date is that we got there in part because when the situation first arose of significant numbers of people moving abroad from the UK, the basic state pension was not regularly uprated each year. As the helpful Library briefing note for the Bill confirms:
“A statutory duty to increase state pensions annually in line with inflation was first introduced by section 39 of the Social Security Act 1973”,
with the first uprating of that type in 1975. The briefing continues:
“Before this, pensions, and other National Insurance benefits, had been increased at irregular intervals by a series of National Insurance Acts.”
There was perhaps not the same assumption as exists today that prices would rise year on year in a way that necessitated an automatic annual uprating.
By the late ’60s and the early ’70s, when inflation rose to historically high levels, it became necessary to uprate social security benefits annually to prevent people from falling behind in real terms. The uprating was introduced, and the 1974 Labour Government linked pensions to earnings—a link that was broken in Lord Howe’s first Budget after the 1979 election.
That seems to be the explanation of how we got out of the habit of automatic upratings, although another explanation was given by a participant in one of the debates in the House of Lords. The issue was debated by the Cabinet in the 1970s, when there was concern about the outflow of foreign exchange from the United Kingdom. At that time, we had an unhealthy balance of payments and the exchange rate was constantly in the news, which was used as a further constraint and reservation in relation to annual upratings.
We are now in a very different situation, and Ministers have acknowledged that that situation does not have a strong logic. Indeed, in a debate initiated by the hon. Member for Thurrock (Andrew Mackinlay) in the Commons in 2000, Lord Rooker admitted that the existing situation was illogical. Referring to the issue of which countries are uprated and which are not, he said:
“I have already said that I am not prepared to defend the logic of the present situation. It is illogical. There is no consistent pattern.”—[Official Report, 13 November 2000; Vol. 356, c. 628.] 
In the debate that we had relatively recently in Committee, the Under-Secretary, who is with us today, acknowledged that aspects of the existing situation were not necessarily logical. He also mentioned that upratings were less frequent in previous periods than they are now, which is partly why we are in the present situation.
As I mentioned earlier, my noble Friend Lord Jones of Cheltenham devoted part of his maiden speech to this issue in the Lords on 25 October 2005. I commend him on selecting the slightly unconventional subject of people living outside the United Kingdom for his speech. He made a powerful case against the unfairness of the existing system and recalled a constituent from his time as the Member for Cheltenham. She had wanted to move to Canada to be with her son and the rest of her family in the later period of her life. She then found out about the frozen pensions rule, but she initially thought that it was simply an administrative glitch and that it would be resolved in short order when the Government found out that it existed. After a while, however, she found that it simply would not be resolved. She told my noble Friend that if she did not move abroad, it would be too late and she would die. She therefore moved out to Canada, but she now lives in very straitened circumstances.
That demonstrates the point that we discussed earlier. For some people, this is not simply an issue of moving to a country where they can get an uprating and where the temperature averages above 80° F for most of the year. People have other links—often family links—with countries, which means that they cannot pick and choose which country to move to without severe personal consequences.
My noble Friend cited two other issues to highlight the potential injustice of the current provisions. One was the small number of British overseas territories. There is particular frustration about the way in which the current anomalies affect pensioners there. The small number of pensioners who live in those countries—at the time, it was about 572—are not covered. It is a great irony that successive Governments have voiced commitment to places such as the Falkland Islands and spent billions defending them in recent years for reasons that we all know, but that people who moved to such places from the United Kingdom do not have their pensions uprated. My noble Friend met the commissioner from the Pitcairn Islands, where, at the time, no individuals were affected by the regulations. However, the commissioner told my noble Friend that he would be retiring and would be caught by them. He was therefore a particularly strong supporter of my noble Friend’s suggestions. I shall return to the financial aspects of the issue later.

Sally Keeble: The Falkland Islands are a slightly different case. Does the hon. Gentleman not accept that it is perhaps not best to base his argument on the needs of people in the overseas territories? Their needs are indeed substantial, but they do not relate to expatriate pension requirements. Their numbers are tiny and the circumstances are very particular.

David Laws: I am grateful to the hon. Lady for her comments. As she will know, my case is not that we should have an unlevel playing field; I am simply seeking to highlight the injustices and irrationality of the existing system. If any of us bumped into someone on the street and told them about that bizarre situation and explained that people in some British overseas territories do not get uprated—[Interruption.] This is a discussion that we have the whole time in pubs in Yeovil. I do not know what the Minister discusses in his constituency, but compared with many issues, this one affects a lot people. I do not want to get too party political, however, because I am trying to keep the debate on a higher plain.

Mark Pritchard: On that higher plain, I would not want the hon. Gentleman to neglect in his most excellent speech the financial issues that he keeps saying that he will address. I would not want the clock to beat him

David Laws: As usual, I am getting conflicting messages from different parts of the Committee.The hon. Gentleman is constantly trying to terminate my speeches early, while the hon. Member for Northampton, North is egging me on.

Sally Keeble: Will the hon. Gentleman give way?

David Laws: I shall just clarify one point. The hon. Gentleman will be delighted to know that I am coming to the end of section 3 of my speech, which is about why the existing system is unfair, and reaching the large and extensive section 4. I suspect that he has been looking over my shoulder and spotted that I am coming on to how we deal with the financial issues. He will be reassured by that. But first I shall give way to the hon. Lady, who is urging me on.

Sally Keeble: On the subject of higher plains, airports are the main thing that the overseas territories need, so the hon. Gentleman’s talk of expatriates’ pensions is obscuring the issue. He must stick to the relevant areas.

David Laws: As ever, the hon. Lady is trying to outspend me in commitments to build airports. All I am asking is that some 572 pensioners get their uprating. I hope that that was a probing suggestion that she made.
I have a final serious point to make about unfairness before I move on to the substantial section of my speech dealing with finances. My noble Friend Lord Jones referred to the possibility that in future, some people in this country who are at or just over the conventional retirement age might want to move to other countries, perhaps to do voluntary work or to use their skills in the developing world. He spoke about people with medical expertise wanting to go to Botswana to help deal with the HIV/AIDS pandemic. Some overseas Governments want people from the United Kingdom with such skills to settle in their countries and to help.
Does it make sense that we should prevent people from exercising their own free choice—this is why Ifeel passionately about the issue—by penalising or rewarding them financially for choosing a particular country? Whether people like it or not, we live in a world in which it is easy for people to move to different countries, take advantage of our fantastic planet and not to get stuck in one place. Governments have no right to impede people’s free decisions to live where they like.

Adrian Bailey: I listened with interest to the hon. Gentleman’s summary of the speech made by the noble Lord Jones. Did Lord Jones indicate in his speech whether he might come under any of the categories outlined by the hon. Gentleman?

David Laws: No, and neither would I make plans, even under a Conservative Government, to flee abroad at the first possibility, although I do not rule out such things. However, I would want Lord Jones and the hon. Gentleman to be absolutely free to make such decisions and not to feel that the choice of where they spend their long retirement or dying days—however the period is described—is being determined by politicians selecting particular countries as worthy of being dealt with differently.
I turn now to finances, which I am being urged to come on to. [Interruption.] The hon. Member for Weston-super-Mare will be reassured to know that this will be the final stage of the introduction. Ministers have admitted that the existing arrangements are illogical. I am not singling out the Minister here: I think that both Government and Conservative Front Benchers have pointed out the large costs involved in tackling the issue. Of course, such things must be taken extremely seriously. However, when Ministers talk about the cost, they do so in terms that are designed not to solve the problem, but to block serious consideration of it. The figure that they start bandying around—I shall save the Minister some time—is£3 billion, which they say would be the cost of implementing the reform in its most ambitious terms. I use the figures that relate to the prices link; only recently did we establish what the Government intend to do on earnings, and we will need those figures to be uprated.
I am happy to take an intervention if I am wrong, but I understand that the £3 billion figure is the cost not only of moving from a frozen pension to a prices uprated pension for future upratings and future pensioners, but of doing that for all pensioners who now live abroad—even those who moved abroad 30 or 40 years ago. The figure represents the cost of bringing their existing pensions up to the same level as in the United Kingdom. Moreover, it also includes the cost of compensating them—the Minister must let me know if I am wrong—for all the money that they did not receive over the past 10, 20, 30 or 40 years as a consequence of their pensions not being uprated.
No one, not even the hon. Member for Northampton, North, with her generous probing amendments, seriously suggests that we should go back and tell a pensioner who moved to Australia in 1960—I do not know whether they would still be alive—not only that we will bring their pension up to the current level, but that we will refund all the money that wasnot paid right back to 1960. That would be absurd.Not even the most enthusiastic pensioner groups realistically expect that to be delivered. Can we therefore put the £3 billion to one side, and acknowledge that no one is asking for all those missing payments to be made?
I remind the Committee that, in an excellent contribution to an earlier debate, the hon. Member for Worthing, West said that it is worth bearing in mind what that £3 billion means. It is the money that we have saved by not paying those pensions to people who have moved abroad. That emphasises the fact that it is money that has been lost to those pensioners; it is not remotely what it would cost to make a sensible forward-looking change.
The other cost that Ministers give is more sensible; it is for the more plausible policy that the overseas pensioner groups are pressing for. That policy would be to have upratings hereon, using the retail prices index or whichever measure is being used for pensions in the United Kingdom, and presumably to bring the pensions up to the existing UK level. Instead of rebating people for the 20 or 30 years during which they received low pensions, we would bring their pensions up to the existing basic state pension level and index it. The Government have given figures for that over the years of about £400 million per annum. That is not an immodest sum, given how much the Chancellor of the Exchequer plays with each year in his Budget, although I note that he always seems to find another £400 million or £500 million for odd gimmicks, particularly before general elections.
That is one option, although I do not think that it would find favour with any of the three main parties in the House, as I have not only said in earlier debates, but stated straightforwardly to the overseas pensioner groups that have come to see me and will also have seen the hon. Member for Eastbourne and others. Given all the other public expenditure priorities, no Government would be willing to bring up to the level of the basic state pension the pensions of those who knowingly moved abroad under such circumstances a number of years ago.
We must look for a solution that deals with unfairness in a way that is financially manageable. In the light of the amount of time left, I will save my speech about costs until the earnings uprating discussion, as that may be a more suitable time for such remarks. Nevertheless, in terms of any changes made to the Bill, we need something that is sensible and affordable, and I assure the Minister that at thegeneral election we will propose a better deal for pensioners—in contrast to the Labour party and to the Conservatives, who seem to be promising not to pay out any more.

Mark Pritchard: Will the hon. Gentleman give way?

David Laws: No, I will finish this section and then give way.
In addition, we will state in clear terms what our pension promises are, how we will deliver them, how the costings will work and how we will pay for them, in the same way as we do for all our manifesto. The Minister can then comment on that.
Let me make a suggestion to the Minister on what the Government should be looking at in relation to earnings uprating. The hon. Member for South-West Bedfordshire proposed a new clause the other day that highlighted a particular problem and talked about the types of changes that might be sensible and affordable, although he did so in particularly rigorous terms, so as to meet the constraints of the shadow Chancellor by making his figure a zero sum. My proposal would bring the costs down massively from the figures of £3 billion and £400 million.
I would start to uprate pensions from where we are now. Of course, the cost would grow over time; the cost of all Government expenditure grows over time, as does the tax revenue, which grows at the rate of earnings, as the Minister well knows. That cost would be much lower, however, at about £15 million or£20 million, on the basis of a prices link in the first year. Obviously, the cost would grow after that and would be significant in 10 or 20 years’ time, but the figure of £15 million or £20 million is much more manageable. My proposal would be fairer to pensioners who move abroad from now, and would in a small way ameliorate the situation for existing pensions.
I apologise for taking up so much time, but this is an important issue. I hope that the ministerial responses will not be based on the assumption that we are proposing all sorts of things that are totally uncosted and unmanageable. Instead, please may we have the assumption that there is unfairness and that we should all think about how any party might introduce affordable solutions? Can we please think about the issue in terms of the problem that is now emerging as a consequence of the Government’s plan to earnings uprate some countries and not others? That will mean the gap between people in different countries and their sense of injustice will grow even more rapidly.
I do not see how Governments of any party can ignore that injustice for ever. If the Minister said, “Yes, I accept that. We will look at the possibilities of doing something about it, although we may phase the process over years and years to make it affordable”, at least we would be finding some way out of a problem that we have been trapped in for 44 years. It is depressing that there is a sense from the Government that this is an illogical situation and that nobody is willing to think of any way out of it.
If all that the Minister was willing to say today—this would be a very big step in Government policy, so he will probably not say it, much though I would like him to do so—was that he would ask Lord Turner or another suitable person to look at the issue and propose an affordable solution, it would be a positive development. He could report back in a year’s time if that was necessary, but if he would only be willing to look for a solution that would deal with this injustice, I would be enormously relieved and gratified.
There is a social injustice here and we have to think of affordable ways of correcting it. Sometimes, fairness has a price, and I hope that the Minister will explain how he intends to end the existing unfairness and how the Government could think about paying the price in a way that would not impose an unacceptable burden.

Nigel Waterson: I am grateful to the hon. Member for Yeovil for engineering this debate within the confines of the Bill. The issue is important and deserved the exhaustive examination that he gave it. I was interested to see that he seems to be suffering from a fit of financial continence today, compared with the first sitting of the Committee. I wonder whether that has anything to do with the brief chat that I had at a reception last night with his hon. Friend the Member for Twickenham (Dr. Cable), who seemed a little taken aback at what I had to say about Liberal Democrat spending commitments.

David Laws: I hope that the hon. Gentleman will accept that there is not a lettuce leaf between me and my hon. Friend the Member for Twickenham, who not only fully agrees with all our proposals on pensions but—I should make this clear—reports back everything that he learns from the hon. Gentleman.

Nigel Waterson: All I can say is that in an admittedly brief conversation, the hon. Member for Twickenham did growl at me that what I mentioned were not spending commitments. However, one man’s spending commitment is—[Interruption.] Yes, it is another man’s probing amendment—or another lady’s. I have to say that, in my years of serving on Standing Committees, I do not think that I have ever come across a probing amendment that cost £14 billion, but who knows? Perhaps there is one lurking out there.
This important issue is also a long-standing one. It certainly bubbled to the surface of my mailbag quite rapidly when I was first elected in 1992. The hon. Member for Yeovil described how it had begun to build since the 1960s. I pay tribute to John Markham, who I think has met all the Front Benchers now. He is a powerful advocate for Canadian residents in the situation described and he speaks for the Canadian Alliance of British Pensioners.
We have already seen the figures. Roughly 1 million UK pensioners live abroad, although that figure is going up all the time, and about half get the uprating and half do not. I recently tabled a series of questions on the issue, and the hon. Gentleman was good enough to quote from the answers to one or two of them. He set out in more detail than I intend to do the vast list of countries where the uprating does not take place. Numerically, we are talking mostly about Australia—the latest figures that I have show that there are about 220,000 such people there—Canada, where there are 142,000, and South Africa, which I think has the third highest number, with nearly 35,000.
However, the schedule to the relevant answer lists many countries where the uprating does not take place. As the hon. Gentleman said, it depends on countries being in the European economic area—Switzerland is also included, interestingly—and on reciprocal social security agreements. I was slightly surprised that in his otherwise exhaustive commentary, he did not go into the issue of reciprocity in great detail, but perhaps I will at least have something new to say on the subject in this debate.

David Laws: I was leaving it for the hon. Gentleman.

Nigel Waterson: I am most obliged. We have reciprocal agreements with a strange collection—I was about to say “bizarre”, but I do not want to start an international incident—of countries. It includes Barbados, which sounds fairly straightforward. My father retired to Barbados, although I do not think that he ever mentioned this issue to me. The list also includes Bosnia and Herzegovina. I imagine that some people retire there, but one wonders why. Turkey is also included, and of course the USA.
Perhaps the most dramatic contrast is between people living in Canada and people living in the USA. I have already explained how an ageing rock star can go and live in a large mansion in Florida and get their retirement pension uprated—no doubt helping to defray the costs of the Prime Minister and his lady wife staying for weeks on end—but if they lived in Canada, that would not be the case. As the hon. Gentleman said, if they lived in various—

It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past One o’clock.